11 Nov 2021

In theory, prices climb for only 2 reasons: to ration demand (old crop) and to create an incentive for farmers to produce more (new crop). Once markets consider these objectives are achieved, prices fall back to their more “natural” levels. Historically this has always been the case, so it should most likely happen again in 2022. Not taking into account this scenario would be a risk management mistake!

So, first, let’s look at demand rationing. Wheat prices are trading at historical highs. These levels should, in theory, impact on world demand. However, at this early stage of the season, there are no signs of any reduced demand for milling wheat. In fact, it is exactly the opposite as people simply must eat and milling wheat cannot be replaced by any other crop! 

In this context, any short-term consolidation is massively bought. There is little doubt that old crop prices will remain elevated during the next 8 months as the current (very tight) world milling wheat supply can only be resolved after the 2022 harvest.  What about new crop prices?  

New crop markets have been sympathetically following the old crop price surge. This new crop price increase has happened early enough in the cropping campaign to give farmers confidence to drill large areas for next season. Despite higher production costs, margins are still there and we can already anticipate the real possibility of global ag. markets entering a restocking cycle in 2022. 

If current, favourable, weather conditions were to remain throughout the season, then this restocking scenario would become more and more realistic. 

Thereafter, the million-dollar question will be: when will the market peak? As risk managers, we favour a step-by-step approach as we are certainly not far from the highs…


Sébastien Mallet